Something very strange appears to be occurring within the BOE. Yesterday, Mervyn King took the market by surprise when he confirmed that the Bank is looking to lower the deposit rate it pays on reserves. This comment suggests that the BOE is looking towards more quantitative easing and sent sterling spiralling lower on the news. What remains puzzling about the comment is that it contrasts to what we are hearing from other global central banks where exit strategies are being discussed rather than further stimulus. Yes, the UK economy has had a deep recession and our financial system is still damaged but given the inflationary data out yesterday these suggestions seem slightly out of line possibly suggesting that the BOE fears a more severe double dip or that it is behind the curve. Neither is good news for UK assets.

Another noticeable action yesterday was how the bond market ignored the surprising inflationary pressures that came through in the different economic releases. The most obvious of these was UK core CPI which remained resiliently steady at 1.8%yoy above market expectation of 1.6%yoy. In addition, the US Empire manufacturing index reported a sharp jump in prices paid. Given the still extensive global spare capacity, the resilience of inflation data given the scale of the economic downturn is not what economists predicted at this stage of the cycle. As Greenspan noted yesterday, inflation is not a current threat and although central banks and indeed to some degree the bond markets are still more concerned about deflationary pressures at this time; it is however a risk worth monitoring, going forward.

Sources: Reuters: BBC: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia:

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